Federal Court Decision – FCT v Desalination Technology Pty Ltd | Click Here |
Full Federal Court Decision – FCT v Desalination Technology | Click Here |
This article is about the original Administrative Appeals Tribunal decision on matters of fact. Please click here if you would like to access the Federal Court Appeal.
In the matter of Desalination Technology Pty Ltd and Commissioner of Taxation [2013] AATA 846 (29 November 2013) (DST), the Administrative Appeals Tribunal (AAT) assessed whether the taxpayer was eligible for a tax offset of $363,281 under the previous tax concession for the 2009 income year. The Commissioner had disallowed the claim stating that the corresponding expenditure amount had not been ‘incurred’.
Background
In 2007, Innovative Design Technologies Group Pty Limited (IDTG) was registered to act as a project manager for all R&D projects and to coordinate the use of labour and equipment for various projects undertaken by DST.
During 2009 IDTG issued monthly invoices totalling $1,065,625 to DST.
DST paid only $149,964 of the total amount invoiced with the remaining balance being debited to an inter-company loan account between IDTG and DST.
The verbal agreement was reflected in a Service Agreement dated 14 May 2010, detailing that DST would make reductions in the total amount outstanding as funds received would prudently allow, with invoices treated as fully paid as at the date it was provided.
The ATO issued a notice of assessment for a tax shortfall on the basis that the majority of expenditure was not ‘incurred’.
Decision
The AAT declared that the expenditure was indeed incurred during the relevant year and that DST was eligible for a tax offset of $363,281 for the 2009 income year due to:
the Service Agreement acknowledging that IDTG will finance the R&D work, meaning that DST has a debt to IDTG for the value of the invoiced work.;
the work was financed through IDTG lending the invoiced amount to DST so that the invoices did not remain outstanding;
the Commissioner conceding in his written submissions that the lack of a fixed date for payment of a liability will not prevent a liability from being incurred; and
DST’s liability to IDTG was created during the 2009 income year (as they were definitively committed and completely subjected to the expenditure), despite the fact that there were conditions affecting the timing of the release of that liability.
Learning Points
Although the taxpayer was successful in this instance, constructive payments and other seemingly legal tax arrangements can be messy business in the world of the R&D tax incentive.
Although the facts seem relatively straight forward and reasonable, this decision like so many before it, could have gone the other way, potentially resulting with the shortfall payable alongside a large administrative penalty for recklessness.
In our experience, the simplest solution is almost always the best. Companies should aim to simply produce an invoice that directly ties to an R&D activity and then match that cost to a bank statement. The ATO has published guidance on how it would like to see ‘incurred’ expenses presented to them in a review.
By adhering to the ATO’s instructed criteria, companies may avoid possible administrative penalties and costly legal battles down the track.
Re Desalination Technology Pty Ltd and Commissioner of Taxation [2013] AATA 846 (29 November 2013).